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What American Airlines must do to end nosedive

In this Friday, Oct. 14, 2011 photo, an American Airlines Boeing 767 takes off from Miami International Airport, in Miami. Even higher fares couldn't pull American Airlines out of its financial nosedive. American's parent, AMR Corp., said Wednesday, Oct. 14, 2011, that it lost $162 million in the third quarter, as fuel spending jumped 40 percent, wiping out higher revenue from fare increases and passenger fees. In this Friday, Oct. 14, 2011 photo, an American Airlines Boeing 767 takes off from Miami International Airport, in Miami. Even higher fares couldn't pull American Airlines out of its financial nosedive. American's parent, AMR Corp., said Wednesday, Oct. 14, 2011, that it lost $162 million in the third quarter, as fuel spending jumped 40 percent, wiping out higher revenue from fare increases and passenger fees. (AP Photo/Wilfredo Lee)
By David Koenig
AP Airlines Writer / October 19, 2011

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DALLAS—American Airlines is in bad need of an upgrade.

The airline posted a $162 million loss on Wednesday, and has lost money in 14 of the last 16 quarters. Shares of parent AMR Corp. dropped 7.5 percent, and they have fallen 66 percent this year as investors worry that the company could be headed for bankruptcy protection.

AMR has nearly $5 billion in cash, more than many of its rivals and enough to avoid bankruptcy anytime soon.

But American needs to solve its labor problems, bring costs under control and provide better service to passengers if it is to pull out of a long financial nosedive that has resulted in the loss of more than $12 billion since 2001.

Here's what American must do, experts say:

--Control labor costs

AMR says its labor costs are $600 million a year more than other airlines -- even more if pensions are included. Partly it's because other airlines dumped pension and other costs when they went through bankruptcy in the past decade.

American's unions hotly dispute AMR's figures and are seeking pay raises.

Management and the pilots' union recently stepped up talks and appear closer to a deal than ever -- negotiations started in 2006. American wants pilots to fly more hours per month, much like they do at competitor Southwest Airlines Co.

Deals with pilots, flight attendants and ground workers could save AMR $300 million to $400 million a year, analysts estimate. That wouldn't cover an expected $1.2 billion loss this year, but it would close the gap with competitors.

"Getting competitive about labor costs is critical for them," says Michael Derchin, an analyst with CRT Capital Group. "That would be a good start."

--Improve service

American needs to improve its service to keep attracting passengers, who have many airlines to choose among. That means arriving on-time more often, which is especially important to business travelers. Its American Eagle subsidiary cancels a high number of flights.

"American used to be the industry leader," says Henry H. Harteveldt, a travel industry analyst with Atmosphere Research Group. "Now it's in the middle of the pack and falling."

Harteveldt said American must upgrade seating in coach, add lie-flat beds in business class on international flights, and expand amenities such as in-flight Internet service and power outlets.

-- Dump gas-guzzling planes

American has announced plans to upgrade its fleet by buying 460 planes from Airbus and Boeing. Chairman and CEO Gerard Arpey says the new planes will transform American by reducing maintenance and fuel costs -- the manufacturers claim the new jets will use 15 percent less fuel than current models -- and giving customers a better ride.

However, those planes don't begin to arrive until 2013 and will be added gradually over several years.

American used to be a leader. It was the world's biggest airline, an innovative company whose ideas -- from frequent-flier rewards to baggage fees -- were loved or hated by passengers; but either way, they were copied by other airlines.

Lately, American's creativity seems to have run dry. Investors have publicly challenged Arpey and other executives to come up with fresh thinking "beyond new flights to Helsinki," as one analyst put it.

Despite such restiveness, there are no clear outward signs that a change in leadership is imminent. "That's not going to happen. This management is in charge," said Ray Neidl, an analyst with Maxim Group LLC, who only a month ago referred to management as "a caretaker of a deteriorating asset."

But some analysts think a shake-up might not be far away.

While the airline industry has enjoyed strong revenue growth and other carriers have returned to profitability in the past two years, "unfortunately AMR sticks out as an airline still generating losses," says Matthew Jacob, an analyst with ITG Investment Research. "I think it's something the board would probably consider."

It's been a terrible year for airline stocks as investors fretted about high fuel prices and a weak economy undercutting travel. The Arca index of airline stocks has dropped 30 percent.

AMR shares have plunged more than twice as much, reflecting fear about its string of losing quarters and high debt. A rash of American Airlines pilot retirements spooked investors, who considered it a sign of insiders bailing out, causing a 33 percent drop on Oct. 3.

AMR reported Wednesday that third-quarter revenue rose 9 percent on higher fares, but fuel spending jumped 40 percent, to $2.3 billion, easily topping wages and benefits as the biggest expense.

The company's loss of 48 cents per share was wider than analysts' forecast of 43 cents per share, according to FactSet. And it forecast fourth-quarter costs that were higher than some analysts had expected.

Investors were disappointed again. The company's shares fell 21 cents to close at $2.61.

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